Triumph of super stupidity

As political strategies go, super is rapidly turning into another
Gillard
government debacle – and a spectacular one even by recent standards.

Any ability to claim reform of the industry and to take credit for cleaning up some of the worst rorts among financial planners is now obliterated by the government’s ambitions to raise more budget revenue from super.

From now until the budget, news will focus on the complaints, the fears, the internal opposition, the warnings and the general nervousness about what the government has in mind for increasing taxes on super.

Assuming the government is not scared off and proceeds anyway, the antagonistic reaction after May 14 will only escalate.

Labor ministers will then have a particular case to argue rather than vague assurances about fairness and only hitting the “fabulously wealthy". (
Craig Emerson
will surely come to regret that particular wording.)

But it’s already obvious this is not going to work according to any grand Gillard plan. It’s not just that Julia Gillard and
Wayne Swan
have proven so unpersuasive in selling their economic agenda and record. When it comes to super, not even the best spin can make up for the substance of changes that will affect so many people.

Simon Crean
’s loud No, for example, can’t be dismissed as merely a display of temper from an abruptly ex-senior minister who wanted Gillard replaced by
Kevin Rudd
. Crean, along with other ex-union leaders such as
Martin Ferguson
and
Bill Kelty
and former Prime Minister
Paul Keating
, are all warning about the risks of fiddling with a scheme they helped establish decades ago as one of Labor’s greatest reforms. It’s impossible to accuse such figures of favouring the fabulously wealthy or being hostage to vested interests.

The delegation to Canberra this week from the banking and financial services industry will only sharpen the divisions.

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Labor is trying to counter this with folksy new government ads advising people that super will be gradually raised from 9 per cent to 12 per cent of pay and that Canberra will also be putting in an extra $500 in super for the more than 3 million people earning less than $37,000 a year.

The catch is that most people earning less than $37,000 a year are either going to be totally dependent on the aged pension or young enough to be just starting their work lives and not focused on retirement income.

Those the government is trying to target are in different positions – all of them much more focused on what change might mean to them. And directly or indirectly, they also number in the millions – including those who fear they could be targeted in future. That involves plenty of older “ordinary working people"’ and unionists who have been contributing to super for decades and are anxious about whether it will be enough to sustain them over the many years post-work.

The government’s idea is to hit those with high balances in their super accounts.

Just what that threshold should be, of course, is a matter of vicious argument – both as a matter of principle and practical effect. It’s obvious that the smaller the percentage of people affected, the less the money that will be raised.

The government was playing around with amounts of $750,000 to $800,000 this year when it was contemplating taxing withdrawals from super on balances over a certain threshold. But a balance of $800,000 gives an annual return of around $40,000 – not exactly fabulously wealthy.

Only when it belatedly realised the extent of the criticism did a panicked government abruptly reject any notion of taxing withdrawals.

That leaves it with two alternatives. One is to increase the 15 per cent tax rate on contributions. It announced last year that this will happen for anyone earning more than $300,000 but the change is not yet legislated – partly because it is so complicated. Lowering that income threshold further to, say, $180,000 would greatly intensify the community antagonism. And given contributions at concessional rates are now limited to $25,000 a year, it is less fiscally rewarding despite the high political cost.

That leaves the other option – increasing the 15 per cent tax on earnings in super accounts for those with high balances. But a balance of $800,000 or so is not going to seem excessive to those trying to figure out an annual retirement income.

In its budget submission, the Association of Superannuation Funds of Australia criticised Treasury’s faulty estimates of the cost of concessions on super and suggested that a threshold above a $2.5 million balance was appropriate for any sort of cap on super tax concessions. Wayne Swan’s hardly going to be dancing a jig about that outcome.

In a release on “super myths" last week, ASFA also argued that government assistance for retirement was broadly comparable across all tax brackets given the importance of the aged pension and other concessions for those on lower incomes. It reflects the sort of fight-back likely to overwhelm government rhetoric on fairness. Yet any attempt to do more for lower or middle income earners would cost the budget dearly.

Tony Abbott
is trying to stay out of the brawl. But he is clearly not committing the Coalition to reversing budget changes to super, saying he can’t fix every problem created by a bad government overnight. That may be politically weak-willed but at least until September, the political blame will remain fixed firmly elsewhere – on Labor.